Will OPEC bring oil markets back to balance?
This week OPEC [which was once feared and could make Western Economies quake and shake] meets in Vienna on November 30. Who can forget the glory days of OPEC when the gnome like Sheikh Yamani [Minister of Oil Petroleum from 1962 to 1986, and a minister in OPEC for 25 years], prayer beads in hand, would hold the global economy in his thrall with his every often cryptic pronouncements. Those were the glory go-go days which were in fact repeated 2010-2014 before the big crash which has seen Riyadh, Caracas, Luanda, Abuja all enter a tail-spin.
OPEC is seeking to bring the oil markets back into balance [the oil markets have had an oil surplus for a number of years]. In October, global oil production was in the order of 80 million barrels per day. Crude oil in New York closed Friday at $46.11 a barrel giving a cumulative oil income of $3.608 billion a day [versus $8.80 billion per day at the price peak of around $110.00 in 2014]. These are very big numbers indeed.
Ryszard Kapuściński wrote in The Shah of Shahs “Oil creates the illusion of a completely changed life, life without work, life for free. Oil is a resource that anaesthetises thought, blurs vision, corrupts.” ‘’Oil kindles extraordinary emotions and hopes, since oil is above all a great temptation. It is the temptation of ease, wealth, strength, fortune, power. It is a filthy, foul-smelling liquid that squirts obligingly up into the air and falls back to earth as a rustling shower of money.
To discover and possess the source of oil is to feel as if, after wandering long underground, you have suddenly stumbled upon royal treasure. Not only do you become rich, but you are also visited by the mystical conviction that some higher power has looked upon you with the eye of grace and magnanimously elevated you above others, electing you its favorite.
Many photographs preserve the moment when the first oil spurts from the well: people jumping for joy, falling into each other’s arms, weeping.
The concept of oil expresses perfectly the eternal human dream of wealth achieved through lucky accident, through a kiss of fortune and not by sweat, anguish, hard work. In this sense oil is a fairy tale, and like every fairy tale, a bit of a lie. Oil fills us with such arrogance that we begin believing we can easily overcome such unyielding obstacles as time. With oil, the last Shah used to say, I will create a second America in a generation! He never created it.
Oil, though powerful, has its defects. It does not replace thinking or wisdom’’. Consider that crude oil traded above $90.00 a barrel from October 2010 all the way though to September 2014. From September 2014 it embarked upon a precipitous drop and traded below $30.00 a barrel in early 2016.
The big supply curve ball was in fact the US which pumped an average of 9.43 million barrels per day in 2015, the highest level since 1972 and +89% since 2008. OPEC’s success is dependent on disciplining its own members which is a little like herding cats. Then they need non-OPEC [Russia, for starters] to cap their production. The US and Canada are not in the conversation and will in fact ramp up production on any uptick in prices.
“The challenge is less with OPEC and more with the outer forces we don’t control,” Emmanuel Ibe Kachikwu, Nigeria’s minister of state for petroleum, said Thursday in an interview in Tokyo.
“The U.S. is beginning to ramp up volumes again.” Once the set-piece is over if not before, the markets are going to appreciate that the salad days are long gone and that these cats who once strutted the global stage have had their best days and then we enter the second leg of the down-turn in these economies.
Russia has shown it can withstand the pain. The Kingdom of Saudi Arabia is going to have to make further painful adjustments and soon stop-loss a deputy crown prince. Other capitals from Caracas to Luanda, from Abuja to Muscat are set to enter uncharted territory.
I do not see WTI trading above $60.00 under any circumstances through 2017. Traders can sell $60.00 strike call options with a 1 year maturity [into a price rally] and pocket the premium.